A Strategy for Pensions at Risk of Extinction

December 8, 2014

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Companies could change, or even eliminate, pension plans,
but workers were entitled to the benefits they had already earned. A government
agency was set up to guarantee that pensions would be paid even if the
sponsoring company went broke. This year may well be remembered as the one when
the fundamental tenet of Erisa, as the law came to be known, was abandoned.

The Pension Benefit Guaranty Corporation, the agency set up
40 years ago to guarantee those pensions, made clear in its annual report
released last month that one group of pension funds would most likely run out
of money within a few years. Absent new legislation, the already modest
pensions of some retired workers will be eliminated.

The endangered pensions are not in the P.B.G.C.’s largest
program, which insures pensions backed by a single company. That program is
said to have a multibillion-dollar deficit, but there is no immediate danger
for pension recipients.

The problem is in the area known as multiemployer pension
plans. Those plans, often involving unionized workers, were once common in
industries like coal mining, trucking and construction. Those plans seemed so
solid in 1974 that they were not even required to be covered under Erisa. When
they were added, years later, they were put into their own separate insurance
scheme. Now that scheme is in danger of failing.

When those funds run out of money to pay benefits, it will
be up to the P.B.G.C. to step in. It now pays a maximum of $12,870 a year for
workers who spent 30 years digging coal or driving trucks, even if the plan
called for larger payouts. A worker with only 15 years of service gets half of
that. But the P.B.G.C. says its multiemployer plan might run out of money in
2018 and is virtually certain to fail by 2025.

In another era, a consensus would have been reached that
something should be done to prevent that from happening. But this is the 21st
century. When a commission was set up to look for solutions to the
multiemployer problem — one that included representatives of pension plans,
unions and employers — it started from the assumption that no government money
would be available. The proposal it came up with was to allow such
plans to cut benefits quickly, on the theory that depriving current retirees of
income would leave some for future retirees. Such cuts would require
legislation.

There are those who are outraged by the proposal. AARP, the
lobbyist for retired people, protested that “the anti-cutback rule,” barring
the reduction of benefits already earned and vested, “is perhaps the most
fundamental of Erisa’s participant protections.” But in the current century,
spending taxpayer money to help the unfortunate is unpopular.

It may not help that the multiemployer plans generally
benefit union members, a group whose political influence is waning. Nor does it
help that the Central States Teamsters fund was legendarily corrupt a few
generations ago, although that fact does not seem to be a cause of its current
problems.

Erisa never covered public pensions, and there are plenty of
troubles in that area now. While few companies still offer defined-benefit
pensions, many local and state governments still do. But Detroit was able to
reduce its obligations in bankruptcy, and some states are seeking ways to get
around legal protections for pension benefits.

The baby boomers now retiring — a group that includes me —
may be the last American generation to leave work assured of adequate income in
old age. In place of defined-benefit pensions, future generations will be left
with their own savings.

Employers, private or public, are no longer willing to
accept the investment risks that come from managing plans that promise
benefits, so that risk has been transferred to workers. Whatever one thinks of
401(k) defined-contribution plans, they offer no guarantees and no assurances
that even retirees who build up substantial balances will not outlive their
money. And the evidence is that most people are not saving much money. They say
the typical household nearing retirement has only $110,000 in a 401(k), an
amount that will not go far.

They want to raise payroll taxes to shore up Social Security
and to make it automatic for workers to join 401(k) plans. Employees could
still opt out, but research shows inertia leads people to stay in if they are
in and to stay out if they are out. They think we should work longer and save
more.

Now, with retired coal miners in danger of losing meager
pensions, the political system seems unwilling to even consider a
taxpayer-supported solution.